Waterstone Financial Inc. has a market cap of $80.3 million; its shares were traded at around $2.57 with and P/S ratio of 0.6.

Highlight of Business Operations:

Our results of operations are also affected by noninterest income and noninterest expense. Noninterest income consists primarily of mortgage banking income. A significant increase in margins earned on the sale of mortgage loans in the secondary market, yielded a $6.9 million increase in mortgage banking income during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Noninterest expense consists primarily of compensation and employee benefits, real estate owned expense and FDIC insurance premiums. The primary reason for the increase in noninterest expense compared to the prior year relates to the expansion of our mortgage banking operations. Of the $10.3 million increase in noninterest expense for the six months ended June 30, 2011 compared to the six months ended June 30, 2010, $7.8 million relates to our mortgage banking operations. Real estate owned expense increased by $2.5 million during the six months ended June 30, 2011 compared to the comparable period in the prior year due to an increase in properties under management and an increase in write downs of asset values, which is reflective of a strategy to become more aggressive in pricing specific properties to expedite the sale process. During 2011 our noninterest expense has been and will continue to be adversely affected by higher deposit insurance premium assessments from the FDIC. FDIC insurance premium expense totaled $2.1 million and $2.2 million during the six months ended June 30, 2011 and 2010, respectively. Our results of operations are also significantly affected by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities.

General - Net loss for the six months ended June 30, 2011 totaled $2.1 million, or $0.07 for both basic and diluted loss per share, compared to net loss of $946,000, or $0.03 for both basic and diluted loss per share, for the six months ended June 30, 2010. The six months ended June 30, 2011 generated an annualized loss on average assets of 0.24% and an annualized loss on average equity of 2.51%, compared to an annualized loss on average assets of 0.10% and an annualized loss on average equity of 1.14% for the comparable period in 2010. The increase in net loss for the six months ended June 30, 2011compared to the six months ended June 30, 2010 reflects a $767,000 decrease in net interest income, a $2.5 million increase in real estate owned expense and a $747,000 decrease in the pre-tax results of operations from our mortgage banking operations, partially offset by a $2.3 million decrease in the provision for loan losses and a $758,000 increase in income tax benefit. The provision for loan losses totaled $10.2 million during the six months ended June 30, 2011, compared to $12.5 million for the six months ended June 30, 2010. Loan charge-off activity and specific loan loss reserves are discussed in additional detail in the Asset Quality section. The net interest margin increased slightly to 2.87% for the six months ended June 30, 2011 compared to 2.84% for the six months ended June 30, 2010.

Mortgage banking segment assets (which consist predominantly of loans held for sale) decreased $46.5 million, or 42.7%, to $62.4 million as of June 30, 2011 compared to $108.9 million as of December 31, 2010. Additional details are provided in the “Loans Held for Sale” section. The $6.9 million increase in mortgage banking revenues from the six months ended June 30, 2010 to the six months ended June 30, 2011 was attributable to increased margins on the sale of loans held for sale as well as an increase in the volume of loans sold. The major components of mortgage banking revenues include fees and premiums associated with the sale of residential loans held for sale, which are discussed in section “Mortgage Banking Income.” The major expenses for the mortgage banking segment are compensation, payroll taxes and other employee benefits, as well as occupancy, office furniture and equipment and other expenses, which are covered generally in the consolidated discussion in section “Noninterest Expense.”

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